On appeal from Superior Court of New Jersey, Law Division, Bergen County.

Approved for Publication, June 11, 1996.

Before Judges Michels, Baime and Villanueva. The opinion of the court was delivered by VILLANUEVA, J.A.D. (Retired and temporarily assigned on recall.)

The opinion of the court was delivered by: VILLANUEVA

The opinion of the court was delivered by VILLANUEVA, J.A.D. (Retired and temporarily assigned on recall.)

We granted leave to appeal in two separate but related appeals *fn1 from a Law Division order compelling Newark Insurance Company and Federal Insurance Company "at their own cost and expense [to] fully defend" the developers of a residential complex. Previously, we had denied both insurance companies' motions for leave to appeal on the coverage issue. We now reverse.

Windsor Cove Associates was the sole developer/sponsor of Grand Cove, a condominium and cooperative development located on the Hudson River in Edgewater, New Jersey. Grand Cove is now plagued with major problems that include leaking and water intrusion, settling of fill and backfill material which has resulted in the cracking of concrete structures, and potential defects in the sanitary sewer system.

This construction defect litigation was brought in 1989 by a condominium association, a cooperative corporation and a master association (collectively, the Associations) on behalf of the owners of fifty-one residential condominium and cooperative units in Grand Cove (the Project). *fn2 The Associations sought to recover damages for design and construction defects from parties who participated in the development, design and construction of the Project. They allege that many of these problems began to appear during construction.

In a Fourth Amended Complaint, the Associations asserted that the Developers *fn3 were liable for damages caused by "severe design and construction deficiencies, defects, errors and omissions." In their Third Amendment to the Fourth Amended Complaint, the Associations asserted claims against the Developers for negligence, statutory violations, breach of contract and warranty, breach of fiduciary duty, and misrepresentation. The Associations claim that the damages allegedly sustained by them are "injury to the property of the Associations and the loss of the use and/or beneficial use thereof." The Associations' expert Carl F. Walter, III certified that this property damage existed in 1987 and "occurred in part in 1987"; the Associations make similar allegations.

The Developers filed a third-party complaint against four insurers, including the two primary carriers Federal Insurance Company (Federal) and Newark Insurance Company (Newark) (both collectively, the insurers or carriers), seeking a declaration of the insurers' obligation to defend and indemnify and alleging breach of contract. The third-party complaint relies solely on the underlying negligence claim. The issues involving Federal and Newark arise from the Fourth Amended Complaint filed in May 1993, which named the Developers and others as direct defendants.

According to the insurance carriers, the trial court permitted the plaintiff Associations to argue damages not asserted in the complaint, i.e., "damage to work performed by others on the project." In other words, the claims for coverage are that these insured Developers allegedly caused damage to the tangible property of other contractors on the Project. The insured Developers, for example, "were performing construction management services, . . . making design decisions, . . . changing the quality of the work in many instances without the knowledge or without the approval of . . . the design professional."

The Developers filed a motion for partial summary judgment for a declaratory judgment compelling Newark and Federal to defend them and reimburse them for defense costs already incurred. Newark and Federal filed separate cross-motions for summary judgment seeking dismissal of the declaratory judgment action. After oral argument the trial court granted the Developers' motion for partial summary judgment, denied the insurers' cross-motions, and ordered Newark and Federal to defend the Developers in the underlying action by order dated April 12, 1995 (April 1995 order). The order provided, in part:

1. The third party defendants, Federal Insurance Co. and Newark Insurance Company, owe a duty to [the Developers] to defend with respect to [the Associations'] Fourth Amended Complaint;

2. Third party defendants, Federal Insurance Co. and Newark Insurance Company, shall at their own cost and expense fully defend third party plaintiffs with respect to the Fourth Amended Complaint . . . .

Federal and Newark filed separate notices of motion for leave to appeal the April 1995 order. On June 19, 1995, we denied the motions noting:

We emphasize that we deny leave to appeal because we do not read or construe paragraph 2 of the order of the Law Division, dated April 12, 1995, to be a mandatory injunctive order. Rather, we read and construe this paragraph to be an interlocutory declaration of the coverage afforded by the third-party defendants [Federal's and Newark's] policies of insurance. Furthermore, this interlocutory declaration does not resolve all issues as to all parties in this matter and the granting of leave to appeal from this interlocutory order "runs counter to a judicial policy that favors an 'uninterrupted proceeding at the trial level with a single and complete review'", State v. Reldan, 100 N.J. 187, 205, 495 A.2d 76 (1985) (quoting In re Pennsylvania R.R., 20 N.J. 398, 404, 120 A.2d 94 (1956)), and undoubtedly will further delay this already unduly protracted six-year old complex matter.

Federal's subsequent application for review by the New Jersey Supreme Court was denied on October 2, 1995.

Thereafter, counsel for Newark advised the trial court at a status conference that since the Appellate Division found that the April 1995 order was not a mandatory injunctive order, Newark had determined that it was not under an affirmative duty to assume the defense of the named insureds until the underlying claims had been settled or tried, at which time a trial on the coverage issues could be held; if the court then determined that coverage was afforded, Newark could pay or reimburse the defense costs.

The trial court advised counsel for the insurers that the intention of its April 1995 order was to direct the insurers to defend the Developers immediately, stating:

You're either going to supply the direct defense of the developers who have big exposure or you're going to pay for their counsel on an ongoing basis. You're not going to wait to the end and assess whether you're going to pay their counsel. You're going to pay them now and that would be my order.

Accordingly, on October 19, 1995, without benefit of a motion from any party, the trial court entered an order directing the insurers to assume the defense of the Developers or commence payment of their attorneys' fees immediately and to pay within thirty days all legal fees and disbursements incurred by the Developers to date. Specifically, the order provided:

1. The Third Party Defendants, [Federal and Newark], shall have until October 27, 1995 to notify Daniel P. Simpson and Gordon Litwin, Esqs. [attorneys for Developers] as to whether or not [Federal and Newark] have appointed new counsel to handle the direct defense of Plaintiffs' claims in this action subject to the right of Defendant/Third Party Plaintiffs [the Developers] to apply to the Court to designate their own counsel; in the event [Newark and Federal] do not elect to so notify Mr. Simpson and Mr. Litwin, their law firms shall remain as counsel of record in the litigation and [Federal and Newark] shall be deemed to have consented to their retention for such purpose;

2. [Federal and Newark] shall pay all defense legal fees and disbursements incurred by [the Developers] to date within thirty (30) days of receipt of invoices for services rendered by [the Developers'] attorneys in connection with this litigation; in the event [Federal and Newark] object to the applicability and/or reasonableness of any such invoices, [Federal and Newark] shall file an application with the Court within such thirty (30) day period with respect to any such invoice or invoices to which [Federal and Newark] object stating the reasons for [their] objections to same or any portion thereof;

3. Invoices rendered by counsel for [the Developers] after the date of this Order shall be paid by [Federal and Newark] within thirty (30) days of their presentation to [Federal and Newark]; and

4. In the event [the Developers] are notified of a demand for settlement by Plaintiff[] [Associations] which is deemed acceptable to [the Developers], [the Developers] shall immediately transmit notice of same to counsel for [Federal and Newark]; upon receipt of such notice, [Federal and Newark] shall have thirty (30) days in which to object to such settlement being consummated by making an application to the Court for a hearing to determine the good faith reasonableness of [Federal's and Newark's] objection within such thirty (30) day period; in the event no such application is made within such thirty (30) day period, [the Developers] shall be free to enter into such settlement with Plaintiff[] [Associations] and [Federal and Newark] shall thereafter be bound by the terms and conditions contained therein . . . .

In November 1995, Federal and Newark filed separate motions for leave to appeal. Those motions were granted, as were Federal's motions for a stay of the October 19 order pending ...

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